Investors may miss out on festive cheer

Christmas cheer may have come early for investors this year, given some market watchers predict support for shares will wane in the lead up to the festive season.

On the day Australian shares posted their biggest gain in a month, markets rose across Asia, the United States and Europe, Merrill Lynch strategist Tim Rocks sent a bold warning to investors.

Mr Rocks’ long-standing year-end target for the S&P/ASX 200 has been 4500 points, the lowest of any of strategist surveyed by The Australian Financial Review this year. But he now thinks his target may be too optimistic.

Mr Rocks said markets would remain weak until the global outlook stopped deteriorating, Australian company earnings expectations needed to be cut to reflect the new low-growth environment and foreign inflows would be weak given the strong Australian dollar.

“I don't want to be a permanent bear here," Mr Rocks said.

“I do think these issues will come to an end, but if anything they’ll be at their most intense over the next couple of months."

Equities strategists surveyed by the AFR recently tipped the benchmark index to finish just below the psychological 5000 point level by the year’s end, at 4947 points.

But Mr Rocks believed such a target was unreachable until macro-economic concerns were addressed and the recent rally, on the back of potentially improved liquidity from the Federal Reserve’s quantitative easing program, would be short lived.

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“There’s a battle going on between liquidity and economic fundamentals, which I think are quite clearly negative," Mr Rocks said. “For now, liquidity seems to be winning but I think that can only take you so far."

To withstand a barrage of negative sentiment, the market watcher has skewed his model portfolio to sectors that offered high yield and protection against a falling Australian dollar.

The biggest overweights were in the healthcare, property, media and infrastructure/utilities sectors, including
ResMed
,
Transurban
,
Asciano
,
West Australian Newspapers
,
DUET Group
and
Lend Lease
.

Goldman Sachs Asset Management head of infrastructure Geoff Frankish said airports owners
MAp
and
Australian Infrastructure Fund
were among his top picks in the sector given their passenger growth and valuation upside.

But Mr Frankish’s top pick was toll-road owner and operator Transurban, also prominent in Merrill Lynch’s model portfolio.

“It’s very well run, they have good growth in front of them and are really good earnings growth over the next few years," Mr Frankish said. “Costs are also under control and they are doing all the right things."

Transurban’s board knocked back a $5.57 a share takeover offer from the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan and CP2 in May.

The shares, which closed at $5.09 on Wednesday, are down 8 per cent this year.

Mr Frankish said it could be some time before the bidders had another shot at Transurban given the price run, though offers from other bidders could be more forthcoming.

“If the domestic market does not start realising the value in some of these assets then the unlisted players will increasingly have a crack at them," he said.

December has traditionally been the second-best month for Australian shareholders, ensuring the sharemarket finished the calendar year on high.

The All Ordinaries index has increased an average 2.2 per cent in December over the past 25 years, according to AMP Capital Investors.

Historically, December has restored Christmas cheer after the tough months of November (-0.3 per cent) and October (-1.2 per cent).